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Title: Globalization and Risk Sharing

Author(s): Fernando A Broner and Jaume Ventura

Publication Date: September 2006

Keyword(s): domestic markets, globalization, international markets, risk sharing and sovereign risk

Programme Area(s): International Macroeconomics

Abstract: This paper presents a theoretical study of the effects of globalization on risk sharing and welfare. We model globalization as a gradual and exogenous increase in the fraction of goods that are tradable. In the absence of frictions, globalization opens new goods markets and raises welfare. We assume, however, that countries cannot commit to pay their debts. Unlike the previous literature, and motivated by changes in the institutional setup of emerging-market borrowing, we also assume that countries cannot discriminate between domestic and foreign creditors when paying their debts. Although globalization still opens new goods markets, we find that it can also open or close some asset markets. The net effect on risk sharing and welfare of this process of creation and destruction of markets might be either positive or negative depending on a variety of factors that the theory highlights.

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Bibliographic Reference

Broner, F and Ventura, J. 2006. 'Globalization and Risk Sharing'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5820